Archive for the ‘Business and Finance’ Category

I came across the following last week and thought to talk about it a bit today:

From unemployment to self employment:

A beggar from Medina came to the Prophet (PBUH) and asked him for money. The Prophet (PBUH) asked him, “Have you nothing in your house?” The man replied, “Only a cloth, part of which we wear and part we use for carpet. And a wooden bowl from which we drink water.” The Prophet (PBUH) told him to bring them to him. He did.

The Prophet (PBUH) held the items in his hand and started an auction, “Who will buy these?” One man bid a Dirham (a silver coin). Another bid two Dirhams and bought the two items.

The Prophet (PBUH) gave the two Dirhams to the beggar and told him, “With one Dirham, go buy food and clothes for your family. With the other Dirham, buy and axe, go out with it and chop wood and sell it in the market. I don’t want to see you again for fifteen days!”

Fifteen days later, the man came back to the Prophet (PBUH) and reported to him that he made ten Dirhams selling the firewood that he chopped!

This story is reported by Abu-Daawood from a narration by Anas ibn Maalik. He did not immediately rate it, but indicated later that its authenticity was sound. The tenor of the story is confirmed by a hadeeth, reported and authenticated by Muslim and narrated by Abu-Hurayra that the Prophet (PBUH) said, “Carrying a bundle of firewood on your back and selling it is better for any of you than begging for money that he may or may not get.” Also reported by Al-Bukhaari from a narration by Az-Zubayr ibn Al-`Awwaam (RA).

Islam encourages business, trade and self employment. Did you expect that Islam and capitalism have something in common? This is one aspect of pre-Islamic era that Islam has approved and encouraged.

I understand that riba (usury) is wrong. I understand that riba is like gambling. I understand that there are many views on insurance.

But, I need to have a fundamental understanding of why speculation is wrong. I know we have to work for our money.

I need to have the sin explained to me. Trust me I have done my share of reading on the matter. Yet, I do not have the basic definition of the sin of riba and gambling and it seems that they share the same root.

Indeed they do, and the Quran calls it Al-Maysir. The word means tools for easy gain.

It is not the ease that is wrong though. It is the belief in it. The central point, IMHO, is what you alluded to when you said that we have to work for our money. The biggest problem with all games of chance, and speculation is one of them, is that they set the wrong mindset. They entice people to believe that there is a shortcut out there. That is contrary to the laws of God which state that means, not gimmicks, lead to results. Gimmicks may work sometimes, or else no one would have ever tried them. But they are short lived and cause more harm than good.

Even Wall Street knows that, or at least they used to. When you open a trading account, you have to sign forms that can fill a book. Forms to explain to you the risks involved, some may even exceed the value of the entire portfolio! When you open an investment account, on the other hand, there are far fewer forms to sign. That is because, even though investments too carry risk, they are natural risks, whereas speculative risks are random. The difference between the two is that investments involve an asset: property, product or service, while speculation is a bet on how such investment will do. In financial circles this is called a derivative. We all know from the global financial crisis of 2008, the extent of harm speculative derivatives can do.

That is the peril of the mindset that is convinced that there is a shortcut to riches that requires no work, no sweat, and no asset. There is no such thing, but speculators won’t accept that disappointing conclusion, just like a gambler keeps telling himself that the next time he will recoup all his losses.

Investments can be win-win affairs, while speculation is always a zero-sum game.

Usury fits that profile too. It stems from the wrong mindset that treats money as a commodity and thus finds what it thinks is a great business model: buy money cheap and sell it for more. That’s right; economists actually call interest the price of money! Money is price, it doesn’t, and shouldn’t have a price.

While you did not ask it, other readers may be wondering: how else can an economy run? How can banking be done without interest? How does an Islamic system finance start-up companies or real estate purchases, etc.?

The answer is quite simple: partnerships. A financier may decide to finance a project in return for a percentage of its equity and profits. But that also means sharing the risk. That is a natural mechanism in the law of God that makes a financier scrutinize the project like his networth depends on it. The result is that frivolous projects won’t find financing, but quality ones will. Mortgage lenders would never lend money to home buyers whom they are almost sure cannot repay the loan, which is what caused the foreclosure crisis of 2008. On the flip side, rich people will still put their money in worthwhile and promising projects, which by their nature benefit a lot more people than the stakeholders.

That, in a nutshell, is Islamic finance. It brings wealth to investors and far reaching benefits to society, advancement of the economy and, most important of all, the right perception of money and finance. It is not a game for clever quants to play, it’s life enhancement for millions of people.

I apologize for not having a MBA. Your response was detailed, as usual. However, I need to go to a simpler and deeper understanding.

My question thus becomes this: How does interest oppress those who are the meek and poor. How is usury a tool of the oppressor.

In other words how is this haraam (forbidden). On a grand scale I see the consequences of poor decision making, giving loans to those who do not have the means of paying back thus leading to bankruptcy. But break it down for me.

For example the issue of adultery is simple to understand as it does destroy the fabric of the family.

I am not trying to be stubborn or argumentative. I need to be able to place my finger on the essence of the sin of interest.

Many people question why adultery is a sin. If the reason is, as you stated, that it breaks up families, then divorce should also be a sin, because it too breaks up families. But it isn’t. It is only strongly discouraged.

Many scholars, past and modern, have attempted to find material reasons why adultery is a sin. Some postulated that it results in paternity uncertainty. If that’s the reason, then modern science can solve this problem with a DNA test. Would that make adultery OK? Of course not.

Some suggest that the reason is unwanted pregnancies. If that’s the reason, then foster homes can solve this problem. Does that make adultery OK. Of course not.

Some guess that the reason is sexually transmitted diseases. If that’s the reason, then immunizations and other protections can take care of this risk. Would that make adultery OK? Of course not.

The interesting thing is that God already told us why adultery is a sin. He says in the holy Quran, “And do not approach fornication; it is a debauchery and a wretched path.” (17:32). It sets a wrong mindset. It makes people view sex, women and marriage differently from God’s moral law. That is what makes it a sin. Sin is violation of God’s law. God designed His laws for maximum benefit to mankind. When man breaks God’s law, it is an objection to God. Adultery sets the sinner on an evil path because he is deviated from the Straight Path and is distanced from God and becomes an easy prey to Satan.

You will observe the same about other sins prohibited in the Quran. Intoxication and unearned gain are prohibited in 5:90. God explains why in the next verse, “Satan only wants to sew between you enmity and hatred with intoxicants and unearned gain, shun you from the remembrance of God and from prayer. Are you ceasing?” (5:91)

God doesn’t say that intoxication can ruin your liver, or that it may endanger other people when you drive drunk. God doesn’t say that gambling can wipe out one’s life savings. God doesn’t mention that both are addictions that are very hard to be free from. God’s reasons are moral. Other material reasons may apply, but they are not why something is a forbidden sin. Intoxication sets a wrong mindset. It makes a person “drink to forget” his problems, instead of heading them on and solving them, gaining strength of character and wisdom in the process. Unearned gain sets the wrong mindset. It makes a person view others as “marks”, to borrow from con artists vocabulary. The right mindset that Islam encourages is that others are fellow human beings, dignified, worthy of respect and care, and having full capacity to be good and contribute to positive human progress.

The sin of interest is that it sets the perception and belief that you can have your money work for you instead of you working for your money. The Prophet (PBUH) said, “None of you would eat better food than food he earned by the work of his hands. God’s prophet David, upon him be peace, did.”, narrated by Al-Miqdaam ibn Ma`dikarib and reported and rated authentic by Al-Bukhaari.

I find it fascinating that God quotes people who have argued that usury is like trading. He does not refute their argument! Instead, He states unequivocally that He made trading lawful and usury unlawful (2:275). God doesn’t want us to be distracted by arguments why something He forbade is bad for us.

I beg you to help me with this. Where do trust funds find themselves. And what is the difference in Islam between a trust fund and inheritance?

Trusts are called Waqf in Islam. The word means holding an asset from being sold or donated and dedicating its income and facilities to designated people or purpose.

Waqf has two types: (1) Waqf Khayri (charitable trust/endowment) and (2) Waqf Ahli (familial trust). The first type is very highly praised in Islam. The Prophet (PBUH) has famously said, “All the work of a child of Adam ceases with his death, except three: an ongoing charity, a knowledge that benefits and a righteous child who prays for him.” Narrated by Abu-Hurayra and reported and rated authentic by Muslim. This has motivated multitudes of Muslims throughout the ages to found thousands of charitable projects and endowments. The result was that nearly all needs of society were taken care of without the government having to do any of it! A stranded traveler knew that he can find a hostel where he could stay the night, warm and safe, at no cost. Orphans and widows didn’t have to be scared or hungry. Desert travelers knew there would be plenty of water wells they could drink from.

Waqf Ahli, on the other hand, has been controversial for a good part of a century now. It is banned by many Muslim countries, such as Turkey, Syria and Egypt. The reason is that they saw much abuse of it. They saw it as a way to concentrate wealth in a family, instead of letting it into the economy. Many people used it as a way to circumvent inheritance law. With familial trusts, they could favor some relatives over others, whereas inheritance law fixes heir eligibility and distribution amounts of an estate.

IMHO, abuse of a system is no reason to ban it, but rather is reason to regulate it. Waqf Ahli has been allowed, even suggested, by the Prophet (PBUH) when one has needy relatives, as has been reported about Abu-Talha dedicating his best garden to his poor relatives after he heard this verse, “You shall not attain godliness until you spend from what you love” (3:92). It is a good way to take care of one’s poor relatives while one is still alive, as well as after he, the trustee, dies. That is the difference between trusts and inheritance. The other difference is what I mentioned above about allotment of shares and designation of beneficiaries.

Nobody ever owns the asset under Waqf and the trustee’s heirs are supposed to carry on the upkeep of the trust. Perhaps that’s why many Waqf assets were neglected to the point of deterioration. That was another reason governments moved to ban them. It would’ve been better IMHO if governments took over the maintenance.

I won some money in a lottery. I know I know it’s haraam (forbidden), but my family and I have accumulated debts and this money comes in handy. Can I use it to pay off our debts? Please say yes!

You may be glad to know that a number of scholars have said yes. Among them are Sheikh Muhammad Al-Munajjid. His rationale is that getting rid of ill-gotten money is necessary and the only proper way he sees to do that is charity and he extrapolates that to debt payoff, based on rulings of Ibn Al-Qayyim and Ibn Taymiya, may God bless their souls.

I agree with the reverend Sheikh on the charity part, but respectfully disagree on the debt payoff part. I don’t see the analogy between charity and debt payoff. If you have dirt in your house, you wash it away; you don’t move it over to your neighbor’s house! Giving away the money is like returning stolen property, but using it to pay debts off is, IMHO, like stashing stolen money with someone else!

Bear in mind that when we stand before God for judgment in the Hereafter, He will ask each of us two questions about our money: (a) How did we earn it, and (b) how did we spend it.

What about the interest on Provident Fund? That is the ultimate saving of a salaried class. Monthly contributions are made to this out of salary on which the government credits interest at 8-10%. Limited withdrawal is conditionally allowed.

And what about taking loan from banks for the purpose of purchasing a house (when there is no other way left)?

This issue has been in debate for quite sometime and is not really settled. The reason it is complicated is because it is not quite similar to the definition of Riba (usury) as agreed about in Islamic literature. Forbidden Riba is defined this way: A lender asks the borrower for the principal at the time of repayment. The borrower says he can’t pay and asks for a reprieve. The lender gives him a reprieve but adds an arbitrary amount to the loan.

Such arrangement does not exist today, not even among loan sharks! Even they tell the borrower before they lend him the money how much the interest will be.

So, does that mean that interest on bank deposits is OK? The scholars who do not see a similarity between interest and the formal definition of Riba, do not see a reason to forbid bank interest. Those who equate bank interest with Riba forbid it.

What complicates matters more is the fact that the monetary systems of today differ sharply from the old days. Back then gold and silver were the only money. Their value does not decrease with time. In today’s economy (since 1971), money is fiat currency not backed by gold. With the massive debts of just about every country, paper money is almost worthless, and decreases in value with time. A lender who gets back his principal only is losing money!

The reason Riba is prohibited in Islam is to prevent rich lenders from taking advantage of the needy. We’ve seen in human history many examples of entire countries enslaved because of their debts.

If you now understand the complexity of the issue and the fact that scholars are not in agreement on it, you can decide for yourself whether to apply for an interest-bearing loan. IMHO, a financial transaction whose conditions are transparently spelled out in a legal document signed by both parties without duress, and where no injustice is suffered by either party, cannot reasonably be wrong. I suggest, however, that you consult your Imaam and make your decision afterward and after much contemplation, because Riba is a severe sin.

I didn’t understand why buying a house is a necessity. You can always rent.

I got my credit card statement and in it they charged me interest on balance unpaid in time. I called and verified that the error was actually mine, out of negligence. I asked them to remove the interest on religious grounds and told them that I will pay the entire remaining balance. They agreed, but said that they will credit the amount on the next statement.

My question is: did I sin because interest was charged to my account, even though it is going to be reversed?

You did not, because you did not deliberately cause it. We are only accountable for actions we do consciously and with sound mind.

It was gracious of your credit company to honor your request, because they have the right to what they did based on the credit card agreement you consented to when you opened an account with them.

I asked several prominent scholars and they all told me that insurance is allowed in Islam. The rationale is that insurance is a social co-sponsorship contract (Takaaful); everybody pitches in so that the ones who eventually need coverage can be helped.

I had reservations about the allowance for life insurance, but I’ve been told by several Islamic scholars that the same concept of Takaaful applies to life insurance too, because the proceeds go to cover funeral and probate expenses, etc.

I read a post on a forum that suggested that it is not proper for a Muslim woman to own or operate a business if that means she will have to mix with men in her employ or who are clients. The post cited some hadeeths, but I found them lacking as evidence.

Lady Khadeeja, may God have been pleased with her, was a successful business woman who operated caravans and trade and hired and managed men, one of whom was the Prophet himself, peace be upon him.

There is nothing wrong in a woman being a business woman, as long as she adheres to Islamic teachings about appearance and mannerism.

I see your point, but didn’t Khadeeja stop working after she married the Prophet (PBUH)? And did she actually travel with the men on those trading caravans?

She did not stop working; she was actually the main financial (and moral) support for the Prophet (PBUH) during the early years of his preaching. As for traveling, we know from several events that men and women traveled in caravans but separately. The women rode on howdahs (sedan chairs affixed to camel humps).

Islam prohibits it because in Islam, time is NOT money. Money is not a commodity to be bought and sold, which is what usurers do. Money is a means by which to acquire property or investments. In Islam, legitimate profit is one gained from merchandising actual products and services, or appreciation of investments. Money does not appreciate.

To understand this better, consider that the only money in Islamic finance is gold and silver. If you compare the value of the dollar, for instance, with the price of gold, you will notice a remarkable reverse relationship! What cost a gold Dinar a thousand years ago, still costs pretty much a gold Dinar today

I know that Islam prohibits interest on money. If I open a savings account that pays interest, will I be committing usury?

One fundamental point a lot of people are not aware of is that today’s currency is worthless paper. Since the world abandoned the gold standard in 1971, currency is no longer backed by gold reserves. What that means is that currency has become a commodity. It appreciates and depreciates and can be bought and sold. It’s no longer money. Economists call it fiat money. I call it phony money!

In his excellent booklet, “Contemporary Economical Issues – the opinion of a Moslem scholar”, Dr. Mahmoud Abu Soud (Published by the Islamic Center of Southern California) defines the two types of riba: Time Riba (Riba an-nasee’a) and Exchange Riba (Riba al-fadhl). Time riba is to get more later than what you paid today, such as what happens with interest bearing loans. Exchange riba happens when you sell one of six commodities the Prophet peace be upon him designated. These are gold, silver, wheat, barley, salt and dates. These were treated as money in the old days. The prophet (pbuh) forbade the exchange of these specific commodities except in equal amounts, hand-in-hand and in kind. That is, you couldn’t trade gold for silver. In modern Western economy, however, they are all commodities and therefore riba doesn’t quite fit them, but in order to be on the safe side (Wara`), I wouldn’t engage in those exchanges except as the prophet said: in kind, equal amounts and hand-in-hand. The only transaction that still fits the Islamic definition of riba is interest bearing loans.

The wisdom of forbidding riba so emphatically in Islam is to prevent the lucrative, but illicit business of the rich taking advantage of the dire need of the needy. If a financial transaction does not involve taking advantage of the other, then it’s not riba! The prophet peace be upon him was asked by a man if it was OK to trade his ripe dates (Rutab) for dry ones (Tamr). The prophet asked the man, “Do ripe dates decrease in value when they dry up?” The man answered, “Yes.” The prophet said, “That is riba for sure!” The man replied, “But, o Messenger of God, I need dry dates now and can’t wait for my ripe dates to dry up.” The prophet replied, “Then it’s all right!”

The reason your bank pays you, say, 5% interest on the money you keep in a savings account is that they take the money and lend it with a higher interest to people who buy real property such as houses or land. They then turn around and sell the deeds of these properties in a secondary market and get more profit than they have to pay you. This works as long as there is a secondary market for real estate, but as we’ve seen recently this doesn’t always happen and that business model can fail miserably! Yet, the banks don’t fail too. That’s because the government bails them out by printing currency. Currency is really worthless paper. Your money actually decreases in value every year because of inflation, among other factors. Just check the price of gold over the years! So if anybody is taken advantage of in a savings account, it’s the consumer and not the bank!

So, don’t agonize much over the meager interest banks pay consumers. When you trade worthless paper for more worthless paper, you’re not practicing riba. You’re not lending the bank money with interest. Your money is ventured out and you get a minuscule share of the profit! The case for riba is difficult to make in this situation. However, it’s a judgment call and perhaps erring on the side of caution is advisable.

All of the above arguments go out the window as soon as we go back to the gold standard, but I doubt very much that would happen anytime soon.

Thanks, but I don’t understand one thing: what about income? How will banks make money?

Through appreciation of investments and businesses that they buy or partner in. Much like what Warren Buffet often does. In Islam, money is not a commodity and therefore should not be bought, sold or rented. The Western expression, “The price of money” is an oxymoron in Islam. Money does not earn money, it buys investments that earn money.

Just to check whether I understood:
A comes to a bank and wants a loan to buy a machine.
The bank buys the machine and gives A the machine.
But the bank takes some extra money, so it has earned a bit.
Is this correct?

The bank may choose to lease the machine to the businessman for a lease amount and duration they both agree to. The bank may also give the machine to the businessman for an agreed on percentage partnership in the business.

Words to ponder

"O you who have believed, be persistently standing firmly for God, witnesses to equity, and do not let the hatred a folk have for you incite you to not do justice. Be just; that is nearer to piety. And watch out for God; indeed, God is Acquainted with what you do."(Quran 5:8)